It turns out 2017 wasn’t so bad after all for South Africa
Summary and Assumptions
• South Africa’s Growth: GDP growth for 2017 as a whole came in at 1.3%, following the trough of 0.6% in 2016. Seasonally adjusted GDP in the last quarter of 2017 increased by 3.1%, and this was the third consecutive positive quarterly growth rate following the second and third quarters growth rate of 2.9% and 2.3% respectively. We forecast a GDP growth rate of 1.7% for 2018 and 1.9% in 2019. The higher growth will be driven by increased confidence, strong demand for export due to the continued robust performance by the global economy and relatively high commodity price, but we expect more growth to be constrained by structural blockages.
• Confidence and Investment: The low business confidence that persisted for most of 2017 resulted in compromised investment levels. Overall, growth in real gross fixed capital formation increased only by 0.4% in 2017 following the contraction of 4.1% in 2016. The election of Cyril Ramaphosa as the President of the governing ANC and later as the President of the country resulted in improved confidence in South Africa. We expect further recovery of investment in 2018 as business confidence in the country continues to rise. The first quarter of 2018 saw one of the largest positive movements in the quarter-on-quarter Business Confidence Index.
• Economic Sectors: 2017 was the year of the agriculture sector. The sector rebounded in a strong way following its very poor performance during 2015 and 2016 as it languished under the strain of one of the harshest droughts in the country’s recorded history. Agriculture contracted by 6.4% and 10.2% in 2015 and 2016 respectively but recovered to record a very impressive growth rate of 17.7% in 2017. Mining was the second fastest growing sector after agriculture in 2017 as it expanded by 4.6% following a contraction of 4.2% in 2016. The recovery of the sector also came on the back of higher commodity prices. We expect agriculture’s performance to moderate in 2018, and that of mining to continue growing.
• Households: Consumer confidence is still quite low but improved slightly in the last quarter of 2017. Real final household consumption expenditure increased from 2.4% in the third quarter to 3.6% in the fourth quarter, and was the only demand component that grew consistently positive during all the quarters of 2017. We do not expect a significant improvement in consumer confidence in 2018 due to higher consumption taxes and the prevailing high unemployment rate.
• Inflation & Interest Rates: Annual inflation in South Africa decelerated markedly to 5.3% in 2017 from the 6.4% recorded in 2016, meaning that inflation moved back into the South African Reserve Bank’s target band of 3-6%. It was for this reason that the Reserve Bank cut interest rates for the first time in July 2017 by 25 basis points to 6.75% from 7.00%. Inflation has continued decelerating and reached 3.8% y/y in March 2018. As such, the Reserve Bank cut interest rates by another 25 basis points from 6.75% to 6.50% during end-March 2018.
• The Fiscus: Due to the insipid economic conditions, revenue collection by government during 2017 was disappointing. As a result of the deteriorated fiscus, new tax proposals were made during the 2018 Budget, with a number of taxes being raised.
• Current Account: The deficit on the current account of the balance of payments declined from 2.8% of GDP in 2016 to 2.5% of GDP in 2017. Expect a slight deterioration of the current account mostly on account of the stronger rand.
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